December 30, 2016 – January 5, 2017

China insurance crackdown – meaningful implications. Fewer and fewer U.S. public companies.

Headlines

FT – India takes stock after first phase of cash crunch 1/1. Despite the chaos of the demonetization, citizens and politicians are giving Indian prime minister Narendra Modi a long leash because they agree with the aims of seeking to clean up the system.
WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 1/2. It’s the basic Supply and Demand equilibrium at play – supply has finally gotten to the point of exceeding demand.
WSJ – China Has Too Many Shopping Malls 2017 1/3. I suppose the question is what will become of all the surplus space when the problem is fully acknowledged.
FT – Turkey orders arrest of hundreds of businessmen in Gulenist purge 1/5. Never waist a good coup attempt – whether it was real or not.

Special Reports / Opinion Pieces

FT View – Offer Maduro’s allies a safe exit from Venezuela 12/29
Wired – The Year in Housing: The Middle Class Can’t Afford to Live in Cities Anymore – Emily Dreyfuss 12/31
- “‘It’s very hard to get people to understand that the affordable housing crisis is not for the very poor,’ says lawyer Mechele Dickerson of the University of Texas, an expert in housing and the middle class. It’s for people with good jobs who are not poor enough to qualify for subsidized housing prices. ‘A family that makes $100,000 can’t afford to buy a house in most US cities,’ Dickerson says.”
FT – The political price of Xi Jinping’s anti-corruption campaign 1/3
FT – Cities offer a glimpse of China’s economic future – Gabriel Wildau, Yuan Yang, and Tom Mitchell 1/3

Briefs

Yuan Yang of the Financial Times highlighted recent promises made by Beijing’s mayor that house prices will not rise in 2017.
- So here’s a new approach, with prices haven risen by more than 25% in 2016 “Beijing’s mayor has promised that house prices in the capital will not rise in 2017 in an attempt to ease concerns over the city’s property bubble.”
- Good for people wanting to get in on the action, bad for those that own property.
- “We must be firm in stamping out speculative investment [in property], increase the supply of residential housing, and guarantee that there will be no month-on-month increases in house prices.” – Mayor Cai Qi
- This message is consistent with national policy that “houses are for living in, not for speculating with.”
- The trick though will be to apply the break and the gas in a manner that keeps pricing static and not falling.
Tom Hancock of the Financial Times covered the new NGO regulation in effect in China.
- In a previous post I highlighted Edward Wong’s article on China’s new regulations on Non-Government Organizations (NGOs) requiring each NGO within the country to have an official sponsor. Well the policy is in effect as of January 1, and guess what…
- “China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China – ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation – will meet the law’s conditions before the January 1 deadline.”
- Oh and there is no grace period.
- As a result organizations are dialing down their operations to shuttling out personnel before December 31.
- At issue is that “the law puts foreign organizations under direct supervision of Chinese police, who in the last two years have detained scores of human rights lawyers and cracked down on local groups advocating for reform via the courts. This month an office of the MPS promoted a video accusing foreign governments of using civil society to promote ‘color revolution’ in China.”
- Bottom line, “the law says: ‘Foreign NGOS carrying out activities within mainland China shall abide by Chinese laws, must not endanger China’s national unity, security or ethnic unity; and must not harm China’s national interests.'”
- As it stands “the MPS has said there are 7,000 foreign NGOs in China, suggesting it has a more expansive definition of the term than foreign experts who put the number closer to 1,000.”
Jacky Wong of The Wall Street Journal illustrated an interesting ploy by China Evergrande to sell equity that acts a lot like debt.
- In a word, shenanigans.
- “China Evergrande Group, the country’s largest developer by assets, said Monday that it has agreed to sell a 13.2% stake in its major subsidiary, Hengda Real Estate, to eight investors for 30 billion yuan ($4.3 billion). This values Hengda, which owns Evergrande’s core property development business, at $33 billion – almost four times the parent’s current market capitalization.”
- So the rest of the company is worth much less than $0?
- “The investment is basically a form of bridge financing in preparation for the company to list Hengda in mainland China, something the developer proposed back in October.”
- Basically, the company is “effectively guaranteeing the investors an average 7.8% yield for the next three years. That is more cash drain for a company that hasn’t had a full year of positive operating cash flow since 2009 and has net debt equal to more than four times its equity, counting perpetuals as debt, among the highest in the sector.”
Dave Gershgorn of Quartz pointed to the automation of Japanese white-collar workers in the insurance industry.
- “One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with ‘IBM Watson Explorer,’ starting January 2017.”
- “Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on investment in less than two years.”
- “Watson AI is expected to improve productivity by 30%, Fukoku Mutual says.”
- “Artificial intelligence systems like IBM’s are poised to upend knowledge-based professions, like insurance and financial services, according to the Harvard Business Review, due to the fact that many jobs can be ‘composed of work that can be codified into standard steps and of decisions based on cleanly formatted data.’ But whether that means augmenting workers’ ability to be productive, or replacing them entirely remains to be seen.”

Graphics

WSJ – Daily Shot: Cities Where Rent Swallows Your Salary 12/29

WSJ – Daily Shot: Selfie-Fatalities 12/29

FT – China/US real estate: safe as houses – Lex 12/30

WSJ – China and the Debt-Refinancing Game in 2017 – Nathaniel Taplin 1/3

WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 – Laura Kusisto 1/2

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

How China’s Insurance Crackdown Spawns More Risks. Anjani Trivedi. The Wall Street Journal. 4 Jan. 2017.

“Following a year in which Chinese insurers aggressively built risky and illiquid portfolios, acquired real estate, companies and stakes in companies at home and across the world, under loose regulation, China’s insurance regulator has taken to severe tightening measures in recent weeks. Regulators have effectively barred insurers from making risking investments and banned certain insurers and insurance products with high cash value and low protection.”

“The repercussions could cause trouble far and wide. Almost 60% of China’s wealth-management products are invested in bond and money-market funds and a growing portion of these products are backed by bonds. And, they account for almost 20% of banking-system deposits.”

“China’s unlisted insurers-infamous among them, Anbang-will now see their wealth-management, product-backed financing platforms squeezed under new rules that bar investing cash raised from investment products. With policyholder deposits accounting for more than 70% of written premiums, more asset-selling may be on the cards.”

Chinese insurers under pressure to rein in overseas deals. Henny Sender. Financial Times. 3 Jan. 2017.

Adding to the WSJ article.

“Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod, acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.”

“Until recently, many analysts expected Chinese insurers to increase their offshore activity.”

Further, due to low interest rates worldwide, insurance companies have been seeking higher return investment categories. As Boston-based consultancy Cerulli Associates notes “investments in the ‘others’ category – which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate – rose from 23.7% in 2014 to 34.2% in June 2016.”

“Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that ‘the insurers have shifted to investing in riskier assets to sustain investment yields. This make their credit profiles more vulnerable to unfavorable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.”

Thus considering these insurers will find it quite difficult purchase overseas assets with capital from China, they will have to already have the cash overseas, have a means to raise cash abroad, or they will need to sell overseas assets to pursue continued investments.

“Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US ratings agencies suggested that it was likely to receive a non-investment grade rating.”

In fact, “Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed (to). That in turn would crimp its ability to buy more.”

“In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued (hurting SWF liquidity), and the US focused inward, it is not clear who will take their place.”

America’s Roster of Public Companies Is Shrinking Before Our Eyes. Maureen Farrell. The Wall Street Journal. 4 Jan. 2017.

“With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.”

“The U.S. is becoming ‘de-equitized,’ putting some of the best investing prospects out of the reach of ordinary Americans.”

“The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.”

“In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.”

“‘There’s no great advantage of being public,’ says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of ‘The Vanishing American Corporation.’ ‘The dangers of being a public company are really evident.'”

“Among them, Mr. Davis and other say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.”

“While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds-pools of capital invested by nations-have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.”

“Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic.”

“Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.”

“With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014… the average public company is more than three times as large as it was in 1997, after adjusting for inflation.”

Unfortunately for investors, it is unlikely that they’re going to be able to invest in a start-up with huge upside potential through the public markets…